China

Market overview

As China looks to increase its tax revenues, the nation's tax authority, the State Administration of Taxation (SAT) is under more pressure. The pressure exerted from above leads to companies being squeezed, especially in the area of transfer pricing.

"[The] Chinese tax authorities are putting more resources in tax audits," said Kevin Ng, tax leader at Deloitte China. "Through automation, tax authorities are able to identify more targets and issues and pursue tax underreported by taxpayers and done in a more efficient way, creating more concerns among taxpayers."

Brendan Kelly of Baker McKenzie China takes a similar view in that the SAT is turning up the heat on taxpayers. "On a practical level, Chinese tax authorities are aggressive on anti-avoidance," he said.

Transfer pricing in particular is an area which is coming under more scrutiny than it did than a few years ago. In 2016, the Chinese government established a third anti-avoidance tax division and aims to have 50 professionals dedicated to scrutinising TP issues in the headquarters of the SAT, Kelly said.

"Transfer pricing ranks highly and tax authorities are aggressively auditing inter-company payments," said Kelly.

Eunice Kuo of Deloitte China said that the SAT has completed the amendment of its TP rules based on the OECD's BEPS project through the release of three bulletins (bulletins nos. 6, 42 and 64). The SAT is scrutinising MNEs concerning their outbound service fee payments, and the management of intangibles. Kuo said that Chinese MNEs need to consider "how to do appropriate restructuring in terms of transactions globally". She mentioned they also have to consider how to manage TP issues in an efficient and compliant way.

Khoon Ming Ho of KPMG China said: "China will be focusing on more sophisticated tools such as bilateral APAs." He also said that there will be increased use of mutual agreement procedures (MAPs) involving the SAT and tax authorities in other countries to resolve potential double taxation issues.

The BEPS project has created an environment where the tax authorities of different countries have a mandate to exchange information with each other. This enhances their ability to tax the TP transactions that MNEs engage in within their territories. Kevin Ng, tax leader of Deloitte China, said: "The release of BEPS means the sharing between tax authorities will be expected. Transparency will affect transfer pricing in China and across the globe. Because of increased transparency, tax authorities will compete amongst themselves. That is, they will protect the revenue subject to their own jurisdiction."


Tax authorities

State Administration of Taxation
No 5 Yangfangdian West Rd
Haidian District, Beijing 100038
Tel: +86 10 6341 7114
Website: www.chinatax.gov.cn


Tax rates at a glance

(As of August 2017)

Corporate income tax 25%
Capital gains tax 25% (a)
Branch tax rate 25%
 
Withholding tax (b)
Dividends 10%
Interest 10%
Royalties from, for example, patents and know-how 10%
Branch remittance tax n.a.
 
Net operating losses (years)
Carryback 0
Carryforward 5

  1. Capital gains derived by foreign enterprises from disposals of interests in foreign investment enterprises are subject to a final withholding tax of 10% instead of income tax. This rate may be reduced by applicable tax treaties.
  2. The statutory rate is 20%, which is reduced to 10% by the Enterprise Income Tax Law Implementation Regulations.
  3. Special rates apply to small-scale enterprises 10-20% and businesses with high-tech status 15%.

Source: EY 2017 Worldwide Corporate Tax Guide and Deloitte


Firm contact details

WTS China